Mahindra’s Q1 profit falls 3.35% to Rs.852.20 crore on lower sales

Mumbai: Mahindra and Mahindra Ltd (M&M) reported a 3.35% drop in net profit for the first quarter of the current fiscal year on a fall in sales, but still managed to beat analyst expectations.

Stand-alone net profit fell to Rs.852.20 crore in the June quarter as compared with Rs.881.78 crore a year ago. Net sales fell 3% to Rs.9,708.05 crore as compared with Rs.10,006.85 crore. A Bloomberg poll of 27 analysts estimated net profit at Rs.741.1 crore and net sales of Rs.9,831.8 crore.

M&M’s consolidated net profit contracted 7.3% on lower tractor and passenger vehicle sales, the company said in a filing to the stock exchanges on Friday. The maker of Scorpio and XUV 500 models reported a consolidated net profit of Rs.831 crore, against Rs.896 crore a year ago.

In a market driven by new models, the absence of the same weighed on the company’s volumes. During the quarter, the company’s passenger vehicles sales dropped to 53,479 units, against 57,656 units a year ago. A patchy monsoon and weak demand in rural India pulled down tractor volumes 18% to 59,150 units in the domestic market.

Despite tepid tractor and utility vehicle volumes, the company was able to retain operating profit margins at 14.3%. It was bumped up by a 650 basis point sequential jump in operating margins of the farm equipment business—to 17.7% in the June quarter from 11.2% in the preceding March quarter. More than a third of revenue earned by the company is accounted for by the farm equipment sector. One basis point is 0.01%.

Pawan Goenka, executive director, M&M, attributed it to a recovery in tractor volumes quarter-on-quarter. “Q4 was one of the worst quarters for the tractor market, with volumes plunging by a third. In the June quarter, the fall wasn’t that deep and it helped.”

V.S. Parthasarathy, group chief financial officer, also attributed the overall margins to a richer sales mix (higher contribution of higher horsepower tractors) and half a percentage point increase in price undertaken by the company in the utility vehicles segment. Subdued commodity prices and cost pruning measures also helped, he said.

The strong operating margins took analysts by surprise with some even considering an upgrade of their earnings estimates. Mihir Jhaveri, analyst at Religare Securities India Pvt. Ltd, wrote, “Mahindra’s net profit came in a tad ahead of estimates on higher margins.” Religare has a “buy” rating on the stock.

“Operating margins were commendable given the subdued top line,” wrote Bharat Gianani, analyst at Angel Broking Pvt. Ltd. “Given the margin beat, we are likely to upgrade our estimates after understanding the margin sustainability from the management. Currently, we have a ‘neutral’ rating on the stock,” he added.

Commenting on the overall performance of the automotive business, Goenka said M&M hopes to recoup market share with the launch of the two new sports utility vehicles—the TUV300 in mid-September and S101 (a compact sports utility vehicle) later in the year. These two, along with the Jeeto (the small truck launched in June) are going to be the big volume drivers for the company, he said.

To be sure, on the back of an improved monsoon, he expects tractor sales to pick up in the forthcoming months. Even as the decline in the tractor market is likely to continue in the second half of the year too, for the full year he estimates the tractor market to grow by 5-6%. “The monsoon has done reasonably well,” said Goenka, adding that this has allayed fears the industry had in the last quarter. “You can live with one bad monsoon, but not with two successive bad ones,” he added.

Shares of M&M fell 0.47% to Rs.1,387.65 apiece on BSE, while the Sensex lost 0.22% to 28,236.39 points.